Using SMSF to Buy Your Business Premises

If you’re a business owner, can your SMSF buy your business premises? The short answer is yes. It’s possible to use your super fund to buy business real property. However, you can’t operate your business out of a commercial property owned by your SMSF for free. Your SMSF will lease out the business premises to you, and you will act as a tenant paying rent at full market rate.

What counts as a business real property?

Before you buy a commercial property through your SMSF, you must make sure it satisfies a few conditions. First, there must be an eligible freehold or leasehold interest in real property. This refers to land and anything that grows on it, as well as structures built on it. Second, the property must be used wholly and exclusively in one or more businesses.

Business real properties include commercial spaces, industrial properties, retail spaces, medical facilities, and rural land.

How to buy business premises through your SMSF

Here’s a quick step-by-step process on buying business premises through your super fund:

Step 1: Check your SMSF investment strategy and trust deed

Make sure that your SMSF investment strategy allows the purchase of a commercial property. Investing in business real property should be in line with the long-term retirement objectives and investment goals of the fund members.

Similarly, you must review the SMSF trust deed to ensure it permits SMSF borrowing or property investment. You may face non-compliance if you proceed with purchasing a property through your super fund if it does not align with the trust deed or investment strategy.

Step 2: Figure out how to acquire the commercial property

An SMSF can purchase a commercial property through a direct cash purchase. The SMSF will use its available funds to buy the property outright, and it maybe be transferred in specie to the SMSF from the seller.

If the SMSF doesn’t have enough funds to make the purchase, it can borrow through a Limited Recourse Borrowing Arrangement (LRBA), or an SMSF commercial property loan. When using an SMSF loan, members must set up a separate security trust or bare trust that’s independent from the SMSF trustees. The bare trust will hold the commercial property until the SMSF pays off the loan completely.

To get a better understanding of SMSF loans, get in touch with the friendly lending specialists at loans.com.au. SMSF loans are a bit more complicated than the standard home loan; it’s important to know the rules and regulations surrounding SMSF borrowing to ensure you’re compliant.

Step 3: Start the purchase process

Once you’ve been approved for an SMSF loan, it’s time to finalise the property purchase. The contract of sale is generally entered into by the appropriate holding or bare trustee established for the LRBA structure. The property will then be transferred to the bare trust until the SMSF loan is completely paid off.

What are the advantages of buying commercial property with an SMSF?

When business owners buy their business premises through their SMSF, the rent they pay goes into their super fund. It allows members to build their retirement savings without having to sell the property to someone else.

You may also be entitled to tax concessions; however, it’s best to check with an accountant to see if you’re eligible.

Another advantage of buying a property through your SMSF is that under a LRBA, your other assets are generally protected as the lender’s recourse is limited to the commercial property held within the borrowing structure, subject to the terms of the arrangement

What are the drawbacks of purchasing a commercial property with an SMSF?

One of the main disadvantages of buying your business premises using your SMSF is the complexity of the purchase. It’s not as straightforward as buying a property outright under your own name. You’ll have to think about your SMSF structure and whether it allows for making investment property purchases. You need to check if the property that you’re buying counts as a business real property. And most importantly, you need to ensure compliance with SMSF rules and regulations, or you may face hefty penalties.

It’s important to have an accountant or a financial advisor who can help you navigate through the whole SMSF process to make sure you adhere to the rules and meet requirements.

Factors to consider before buying business premises through an SMSF

Here are some important things to keep in mind when buying a commercial property through your SMSF:

• Investment strategy and trust deed. Confer with your lawyer or financial adviser when reviewing your SMSF’s trust deed and investment strategy. Ensure that you’re allowed to purchase a property using your SMSF.
• Arm’s length valuation. You may need to have the commercial property independently valued before leasing it out or selling it.
• Arm’s length lease agreement. If you’re using the SMSF property as your business premises, you need to have a formal lease agreement, the rent price must reflect true market value, and follow a strict payment plan.
• Additional costs. Consider legal fees, stamp duty, council rates, maintenance expenses and other costs associated with ownership. Capital gains tax considerations may arise when the property is sold.
• SMSF commercial property loan. Not all SMSF loans are the same. Check out the range of SMSF commercial loans at loans.com.au and find one that suits you and your fund members’ needs.

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